Alcoa’s stock sinks to 15-month low after analyst downgrade

KathleenBurke

Shares of Alcoa Inc. sank to a 15-month low after analysts at Sterne Agee CRT downgraded the aluminum giant, citing a bleaker industry outlook and concerns over valuation.

Analyst Josh Sullivan lowered his rating to neutral, after being at buy for more than a year, and slashed his stock price target to $12 from $17.

The stock
AA, +2.36%
dropped 1.5% in midday trade, putting it on track to close at the lowest level since March 3, 2014. It has sunk 9.3% in the past three months and 26% year-to-date, while the S&P 500
SPX, +0.59%
has gained 0.7% and 3.1%, respectively, in the same period.

The aluminum industry was booming last year -- Alcoa’s stock soared 49% in 2014, compared with an 11% rise in the S&P 500 -- as a result of high premiums, reduced Indonesian bauxite supply and Chinese curtailments on exports. But this year, Sullivan said all of these trends have been reversing.

“Over the last 12 months, [Alcoa] has made a generational portfolio shift as it curtailed high cost commodity operations while increasing value-added exposure,” Sullivan wrote in a note to clients. “This strategy ensures the longevity of the company; however, in the intermediate term, there are hurdles to meeting goals in the value added business, and unfortunately, less support from the commodity portfolio as there was in 2014.”

Sullivan said investors will eventually be well served by Alcoa’s transformation, which included curbing high-cost commodity operations and the divesting of lower-value assets. But he said, “so has the rest of the world.” He believes the company’s moves have created some “hurdles” in the near term, which means Alcoa will now have to “aggressively execute on integration” to meet its targets for the year.

With Alcoa facing a challenging period and given the fundamental risks to its commodity business, Sullivan believes a bullish outlook for the stock is no longer warranted.

He believes the “risk reward” on the stock “is balanced given the lack of catalysts and increased commodity risk over the next 12 months.”

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